Sentiment in the gold, stock
and commodity markets

When the gold price rose to
$1000 in late February there was naturally a lot of enthusiasm
about this market's prospects, which, combined with the almost
uninterrupted $200 rise over the preceding five weeks, paved
the way for a downward correction. The gold price then fell for
eight trading days in a row, with the eighth down day being last
Wednesday. The stage was thus set for a rebound, but as noted
in last week's Interim Update the fact that the 8-day decline
had barely put a dent in bullish sentiment suggested that the
overall correction from the February high had not yet run its
course.

Interestingly, while the 8-day decline generated very little
concern amongst gold bulls, Thursday's rebound from support near
$900 was greeted with unrestrained exuberance. For example and
as illustrated by the following chart, the premium to net asset
value of the Central Gold Trust (GTU), a closed-end fund that
invests in gold bullion, surged from an already-high 20% on Wednesday
to a new all-time high of 33% in response to Thursday's technical
rebound. Buyers of GTU near the close of trading on Thursday
were, in effect, paying about $1250/ounce for gold while the
spot gold price was in the $930s. No well-informed investor would
do this.

If the pullback that culminated
last Wednesday had been accompanied by significant concern and
the subsequent rebound had been accompanied by scepticism then
the gold market would be well positioned to resume its intermediate-term
upward trend. However, this is clearly not the situation.

Stock Market Sentiment

Extreme short-term optimism
in the gold market is occurring alongside extreme short-term
pessimism in the stock market. For example, the following chart
of the weekly AAII Sentiment Survey indicates that 70% of survey
respondents were bearish as of last week, versus only 19% that
describe themselves as bullish. This happens to be the highest
bearish percentage in the survey's history.

We won't argue that the incredibly high bearish percentage isn't
justified by both the price action and the fundamentals. We also
won't claim that total capitulation has occurred. However, if
the current long-term equity bear evolves in similar fashion
to previous examples then total capitulation lies at least a
year, and potentially as many as 5 years, into the future. In
the meantime there is a sentiment platform in place capable
of supporting a strong counter-trend rebound.

With the exception of those
who remain in a blissful state of denial, observers of the economy
and the financial markets realise that the global boom has ended
and that a new boom is not going to begin anytime soon. Many
people are therefore extrapolating today's bearish industrial-commodity
supply/demand trends (falling demand relative to supply) well
into the future. In other words, there is a great deal of pessimism
built into the current prices of most industrial commodities.

A good example of the current stark difference between gold sentiment
and industrial-commodity sentiment is the relative performances
of the Central Gold Trust (GTU) and the Uranium Participation
Corp. (TSX: U). GTU, as noted above, holds gold bullion and currently
trades at a huge premium to its net asset value (NAV). U, on
the other hand, holds an industrial commodity (uranium) and is
currently priced at a substantial DISCOUNT to its NAV (by our
calculations, Friday's closing price of C$5.95 for U represented
a discount of about 16% to the market value of its uranium).

Cramer
Jim Cramer, a very high-profile and outspoken commentator on
the financial markets, has recently had a lot to say about gold,
almost all of it positive. At the same time he has apparently
been saying bearish things about natural gas.

Cramer is a good indicator of public sentiment, meaning that
when he is very bullish it generally means that most people are
bullish and when he is very bearish it generally means that most
people are bearish. Cramer's current outlook therefore confirms
that there is considerable optimism built into gold's current
price and considerable pessimism built into the current prices
of natural gas and other industrial commodities.

By the way, we understand that Cramer has been advising people
to scale into gold on weakness, which is actually very good advice.
Our point is that his current strong focus on gold adds weight
to the view that sentiment represents a barrier to significant
additional SHORT-TERM gains in the gold price.

Conclusion
Sentiment suggests that there will soon be a temporary shift
away from the premier counter-cyclical investment (gold) to cyclical
investments such as general equities and industrial commodities.
Silver is part monetary (counter-cyclical) and part industrial
(cyclical), so if/when this shift takes place it will probably
build on its recent strength relative to gold.